RM250b stimulus is supportive of market

The stimulus packages will effectively put more money back into the pockets of consumers, improving their cashflow, says researcher


MALAYSIA recently announced two stimulus packages within a month, totalling more than RM250 billion, the largest in the country’s history, to combat the financial and economic fallouts from the ongoing coronavirus crisis.

Dubbed as Prihatin Nasional and said to be “a more comprehensive stimulus package”, the capital injection in various forms are equivalent to 17% of the country’s GDP and dwarf the global financial crisis (GFC) 2008/2009 bailout which was RM67 billion or 8% of the GDP.

The first package, the economic stimulus package (ESP) was announced by then Prime Minister Tun Dr Mahathir Mohamad on Feb 27. The new Perikatan Nasional government then announced the second stimulus package.

The main focus is to assist the vulnerable groups — the small and medium enterprises (SMEs), middle 40% (M40) and bottom 40% (B40) — that are expected to be the worst hit from the economic fallout.

For both packages, direct government fiscal injection stands at RM25 billion and both packages aimed to cushion the impact of the pandemic.

To strengthen the rakyat’s safety net during this very uncertain time, the second package comprises RM128 billion to protect the people’s welfare, RM100 billion to protect the SMEs and RM2 billion to strengthen the economy.

For the remaining RM225 billion not directly financed by the government, RM100 billion or 44.4% will be through the deferment of all loan or financing repayments for a period of six months effective today, as announced by Bank Negara Malaysia (BNM).

The balance RM40 billion will be the withdrawal from the Employees’ Provident Fund’s (EPF) Account 2, RM50 billion in loan guarantees from Danajamin Nasional Bhd to struggling companies seeking to raise funds for working capital and the remaining RM35 billion will be from various government agencies.

The Malaysian Reserve looks at what the package means to the economy.

Larger Fiscal Deficit, Govt Debt

Analysts expect the global economic crisis due to Covid-19, the oil price war and dwindling external demand will impact Malaysia’s national revenues.

With the government lowering the oil price projection between US$35 (RM151.55) and US$40 per barrel for Brent, this would translate to an oil revenue loss of between RM6.6 billion and RM8.1 billion.

With the direct fiscal injection by the government limited to RM25 billion, Public Investment Bank Bhd (PublicInvest) believes this may push the country’s fiscal deficit to 4.8% against the projected 3.4% when the first fiscal stimulus was announced.

“Though looking a little stretched, unprecedented times call for unprecedented measures.

“The expected fiscal deficit in 2020 is still manageable and a far cry compared to the 6.7% and 16.6% fiscal deficits at the height of the GFC in 2009 and commodity crisis shock in 1982,” it said in a report.

MIDF Investment Bank Bhd expects the fiscal deficit to widen to -5.9%, mainly due to a larger contraction of the government’s revenue as the GDP growth slowdown would derail the revenue target of RM244.5 billion this year.

“Based on Budget 2020, Brent crude oil price was assumed at an average of US$62 per barrel and Malaysia’s GDP growth at 4.8% year-on-year (YoY). We expect government revenue to record lower at RM235 billion this year given that oil price at US$41/barrel and GDP growth at 2.7% YoY.

“On top of that, an increase in government expenditure via the Prihatin Nasional ESP is another factor causing the budget deficit to widen. We view the package can cushion some of the Covid-19 impacts, besides other headwinds on the Malaysian economy,” it said.

AmBank Group chief economist and head of research Dr Anthony Dass said it is likely for the fiscal deficit to reach RM74 billion or 4.9% of the GDP, which is lower than the 6.7% reported in 2009.

He said a fiscal deficit of below 5% of GDP would not put a strong pressure on the re-rating of Malaysia by international ratings agency, currently at ‘Stable’ ie A3/A-.

Dass believes federal government debt will reach 55% of GDP from 52% previously.

“It is within the 55% statutory threshold. And the good point is that the government has also committed to maintaining fiscal discipline of not borrowing to fund operating expenditure,” he said in a report on Monday.

MIDF believes the government debt will expand beyond the 55% rule this year, at a projected 56.1%.

As of 2019, the federal government debt to GDP ratio is 52.5%.

“Hence, there is extra fiscal capacity roughly about RM37.8 billion, subject to the 55% government debt to GDP ratio rule. The government has injected circa RM25 billion via the two stimulus packages.

“Continuation of infrastructure projects is part of the packages and ringgit depreciation would pressure foreign debt to increase in 2020. Moving forward, we believe the government will raise the ceiling rule from 55% to 65% in order to provide more fiscal space for future spending,” MIDF said.

Critical Private Consumption

As private consumption is the nation’s main engine of growth — making up about 59% of the economy — reviving household spending is a key priority.

Yet analysts reckon that a combination of supportive fiscal and monetary policies may put the economy on an even keel, but may not be able to push it higher due to the still-raging headwinds.

PublicInvest said the massive measures to assist private consumption totalling RM163 billion (combination of measures by BNM and social assistance) is equivalent to 20% of private consumption-to-GDP ratio.

“This may be able to prevent activities from collapsing, especially with a lengthy period of the Movement Control Order (MCO) (28 days in total).

“Even then, no one can tell with certainty when the pandemic will peak or whether the MCO will be extended or lifted by mid-April. This will certainly add another layer of uncertainty on the economy.”

PublicInvest said private consumption is the most vibrant sector in the economy, recording a resilient long-term average growth rate of 7.1% from 2016 to 2019. It contributed over 80% of growth during 2016-2019, making the sector a significant and main focus during any economic headwind.

“It is estimated that for every 10% drop in private consumption, GDP may decrease by 1.8% which begs the need to roll out massive measures to assist private consumption or risk pushing the economy into a tailspin,” PublicInvest said.

Affin Hwang Investment Bank Bhd said private consumption growth will not normalise until late 2020 as households will likely be impacted from possible temporary shocks to their incomes and a slight erosion of purchasing power.

“Households are also likely to be cautious on their spending due to the uncertain employment situation, as well as affected by the expected slower growth in real disposable income.

“With a drop in commodity prices, if it continues, those in the rural areas, and those involved in economic activities such as plantation, it may have some impact on their incomes, therefore their contribution to consumer spending will be lower as well,” it added.

MIDF views private consumption as the country’s only hope and expects it to grow 5.9% YoY, although at the slowest pace in four years.

“Significant rakyat-centric measures announced in ESP including a six months moratorium on individual loan payments, reduction in EPF contribution rate, EPF Account 2 withdrawal and one-off cash assistance will result in an increase of disposable income for consumers.

“We foresee a rebound in consumer spending in second half of 2020 (2H20) as the virus is expected to be contained. On top of that, inflationary pressure is set to hover at low levels due to cheap fuel prices and the job market to remain under full employment conditions with unemployment rate below 4%, supporting consumption,” it said.

Malaysia Rating Corp Bhd chief economist Nor Zahidi Alias said the additional assistance to the rakyat is critical as it can help cushion the drop in private consumption, Malaysia’s major pillar of growth.

“History shows that it is critical to support private consumption during an economic downturn.

“The handouts for M40 and B40, as well as the wage subsidy programme, are commendable as these will not only help protect the vulnerable but also boost private consumption,” he said in a report.

Sectoral Review

Overall, according to AmInvestment Bank Bhd, the stimulus packages will effectively put more money back into the pockets of consumers, improving their cashflow.

“This will help boost consumer spending for necessities during the MCO and the Covid-19 outbreak. We believe this will be positive for consumer companies, especially those producing staple food products,” the research arm said.

PublicInvest said these initiatives will benefit companies under its coverage, a large part of which are involved in consumer staples.

“We maintain our ‘Neutral’ stance on the sector as we expect spending to remain prudent or even curtailed in the face of challenging economic growth prospects,” it said.

As for the banking sector, analysts believe is by far the biggest “contributor” to the stimulus package — the ESP measures will provide relief to individuals, SMEs and corporate borrowers whose cashflows are tight due to the outbreak.

AmInvestment said the repayment moratorium, as well as initiatives to restructure and reschedule borrower’s financing, will prevent banks’ impaired loans from spiking significantly for at least the next six months, thus avoiding any substantial increase in provisions that banks may need to set aside.

“The availability of relief facilities and guarantee schemes will provide a lifeline to SMEs that contribute significantly to the domestic GDP. It will enable them to continue their business operations and avert a sharp rise in unemployment.

“All banks and insurance companies are potential beneficiaries. Most banks such as Malayan Banking Bhd, RHB Bank, Public Bank Bhd, Hong Leong Bank Bhd and even the smaller cap banks such as Alliance Bank Malaysia Bhd will stand to benefit from the expanded relief funding set aside for SMEs by the government and BNM.”

Equity Market

Analysts largely believe the enlarged stimulus package is supportive, but not a key market impetus.

MIDF expects volatile markets to linger as there could be another shallow and quick second downward before a period of a recovery.

“While we expect equity markets will recover from current levels, we are cognisant of the fact that markets are extremely volatile at the current juncture, which presents a very precarious situation for investors to navigate.

“In the immediate term, market sentiment will continue to be dominated by the success and setbacks in containing the spread of Covid-19 infections both locally and worldwide,” it added.

PublicInvest suggests the market will remain a very trading-oriented one until the dust fully settles.

“Whatever the prognosis, or whenever the peak is achieved (ie flattening of the curve), we have no doubt that the world will overcome this.

“The market will remain a very trading-oriented one until the dust fully settles. Be ready for the wilds ups and downs, though stocks hammered in the aftermath of this recent sell-down will gradually recover,” it added.

Both MIDF and PublicInvest anticipate the FTSE Bursa Malaysia KLCI to close at around 1,480 points year-end. AmInvestment’s end-2020 target stands 1,300.